Measuring and Improving

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Measuring and Improving Corporate IT Performance
through the Balanced Scorecard Prof. dr. Wim
Van Grembergen wim.vangrembergen_at_ufsia.ac.be Uni
versity of Antwerp (UFSIA) University of Leuven
(KUL)
See Prof. Dr. Van Grembergens related article in
ISACAs Information Systems Control Journal
(volume II 2000). View www.isaca.org for
subscription information.
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Contents
IT EVALUATION IT INVESTMENT PARADOX A GENERIC
IT BALANCED SCORECARD BUILDING AN IT BALANCED
SCORECARD IT BALANCED SCORECARD AND BUSINESS
BALANCED SCORECARD IT BALANCED SCORECARD
PRACTICE
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IT Evaluation
IT Balanced Scorecard
Intangible
Information Economics Cost/Benefits
Analysis Return on Investment Internal Rate of
Return Net Present Value Payback Period
Benefit/Costs
Tangible
4
IT Investment paradox

• investments in IT never cease to grow
• business managers worry about its benefits
• in academic publications it is reported that the
  benefits
• of IT investments might not be as high as
  could be expected
• this phenomenon is called the "IT investment
  paradox" or
• the "IT Black Hole large sums are invested in
  IT and seem
• to be swallowed by a large black hole
• without rendering many returns

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The Balanced Scorecard

• Kaplan and Norton developed the balanced
  scorecard in the
• early 90's
• their idea traditional financial measures
  should be supplemented
• with measures concerning customer satisfaction,
  internal processes,
• and the ability to innovate
• these additional measures should assure future
  financial
• results and drive the organization towards
  its strategic goals
• while keeping all four perspectives in balance
• they propose a three layered structure for the
  four perspectives
• - mission "to become our customers' most
  preferred supplier"
• - objectives "to provide our customers with
  new products"
• - measures "percentage of turnover
  generated by new products"
• their BSC can be translated into the more
  specific needs of an
• IT function

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The Balanced Scorecard
How do we look to shareholders ?
Financial Perspective
Objectives
Measures
What must we excel at ?
How do customers see us ?
Internal Business Process Perspective
Customer Perspective
Objectives
Measures
Objectives
Measures
Learning and Growth Perspective
Objectives
Measures
Can we continue to improve and create value ?
Source Robert S. Kaplan and David P. Norton, 1994
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The Balanced Scorecard

• Customer Perspective
• How do the customers view the company?
  
• Mission
• To deliver the best added value to the customer
• Objectives
• new products
• partnership with customer
• Measures
• of new products of turnover
• joint development efforts

• Financial Perspective
• How do the shareholders view the company?
• Mission
• Assure added value for shareholders both in the
  short and long term
• Objectives
• survive
• prosper
• Measures
• ROI and cash flow
• market share

8
The Balanced Scorecard

• Internal Business Process Perspective
• How can the company improve its internal
  operations to improve the service to the
  customers?
• Mission
• Efficiently produce and deliver products and
  services
• Objectives
• excellence in production
• excellence in deliveries
• Measures
• cost price per unit
• average throughput time for orders

• Learning and Growth Perspective
• What should the company do to remain successful
  in the future?
• Mission
• Innovate, improve and learn to the maximum
• Objectives
• technological leadership
• product focus
• Measures
• time necessary to develop a new generation of
  products
• number of old products to number of new products

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A generic IT Balanced Scorecard
Corporate Contribution
Operational Excellence
User Orientation
Future Orientation
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A generic IT Balanced Scorecard
User Orientation
Corporate Contribution
How do the users view the IT department?
How does management view the IT department?
Operational Excellence
Future Orientation
How effective and efficient are the IT processes?
Is IT positioned to meet future challenges?
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A generic IT Balanced Scorecard

• User Orientation
• How do the users view
• the IT department?
  
• Mission
• To be the preferred supplier
• of IS and to exploit business
• opportunities maximally
• through IT
• Objectives
• preferred supplier
• partnership with users
• user satisfaction

• Corporate Contribution
• How does management view
• the IT department?
• Mission
• To obtain a reasonable
• business contribution
• of investments in IT
• Objectives
• control of IT expenses
• business value of new
• IT projects
• business value of the IT function

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A generic IT Balanced Scorecard

• Operational Excellence
• How effective are the
• IT processes?
• Mission
• Efficiently deliver IT products
• and IT services
• Objectives
• efficient software development
• efficient computer operations
• efficient help desk function

• Future Orientation
• Is IT positioned to meet
• future challenges
• Mission
• Develop opportunities to
• answer future challenges
• Objectives
• permanent training and education of IT
  personnel
• expertise of IT personnel
• research into emerging information technology
• age of application portfolio

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A generic IT Balanced ScorecardMeasures for
Corporate Contribution

• Control of IT Expenses
• percentage over or under IT budget
• allocation to different budget items
• IT budget as a percentage of turnover
• IT expenses per staff member
• Business Value of new IT Projects
• financial evaluation based on ROI, NPV, IRR, PB
• business evaluation based on Information
  Economics
• Business Value of the IT function
• percentage of the development capacity engaged
  in strategic projects
• relationship between new developments/infrastruct
  ure investments/replacement investments

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New Information Economics (Parker, 1996)
Traditional ROI () value linking () value
acceleration ()
value restructuring () innovation ()

• Business Value
• Strategic match ()
• Competitive advantage ()
• Competitive response ()
• Management information ()
• Service and quality ()
• Environmental quality ()
• Empowerment ()
• Cycle time ()
• Mass customization ()
• Business strategy risk (-)
• Business organization risk (-)

• IT Value
• Strategic IT architecture ()
• IT Strategy risk (-)
• Definitional uncertainty (-)
• Technical risk (-)
• IT service delivery risk (-)

Adjusted ROI
- Business Risk
- IT Risk
VALUE (business contribution)
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A generic IT Balanced Scorecard
Measures for User Orientation

• Preferred IT Supplier
• percentage of applications managed by IT
• percentage of applications delivered by IT
• Partnership with users
• index of user involvement in generating strat.
  applications
• index of user involvement in developing new
  applications
• User Satisfaction
• index of user friendliness of applications
• index of user satisfaction

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A generic IT Balanced Scorecard
Measures for Operational Excellence

• Efficient Software Development
• number of lines of code per person per month
• average days late in delivering software
• average unexpected budget increase
• percentage of projects performed within SLA
• percentage of maintenance activities
• Efficient Computer Operations
• percentage unavailability of mainframe and
  network
• response times per category of users
• percentage of jobs done within time
• Efficient Help Desk Function
• average answer time of help desk
• percentage of questions answered within time

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A generic IT Balanced Scorecard
Measures for Future Orientation

• Permanent Education of IT Personnel
• number of educational days per person
• educational budget as percentage of total IT
  budget
• Expertise of IT Personnel
• number of years of IT experience per staff
  member
• age pyramid of IT staff
• Research into emerging Technologies
• percentage of IT budget spent on research
• Age of the Applications Portfolio
• number of applications per age category

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Building an IT Balanced Scorecard
Project phases
1. presentation of the concept to senior and IT
management 2. establishing a project team 3.
data-gathering phase where information is
collected on - corporate and IT strategy
- IT metrics already in use for performance
measurement 4. developing the organization-specif
ic IT balanced scorecard
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Building an IT Balanced Scorecard
Developing principles

• start with a "standardized" model as presented
• apply the Kaplan and Norton principles
• l build in cause-and-effect relationships
• l include sufficient performance drivers
• l linkage to financial measures
• implement the IT balanced scorecard as a
• Strategic Management System
• l clarify and translate vision and strategy
• l link strategy to team and individual goals
• l link strategy to resource allocation
• l organize strategic feedback

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Building an IT Balanced Scorecard
Cause-and-Effect Relationships
IF we increase IT employee's motivation (future
orientation) THEN this will result in better
quality of the developed applications

(operational excellence) THEN this
will meet better user expectations (user
orientation) THEN will enhance the support of
business processes (business contribution)
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Building an IT Balanced Scorecard
Outcome Measures and Performance Drivers
Outcome measures Performance drives
lines of code per person number of
educational days
index of user satisfaction response time of
help desk
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Building an IT Balanced Scorecard
Financial Outcomes
"A failure to convert improved operational
performance into improved financial performance
should send executives back to the drawing board
to rethink the company's strategy or its
implementation plans". (Kaplan and Norton)
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Building an IT Balanced Scorecard

• Clarify and Translate Vision and Strategy
• align IT and corporate strategy
• clarify cause-and-effect relationships
• build in sufficient performance drivers in order
  to visualise
• how the IT strategy will be achieved
• build in sufficient outcome measures in order to
  monitor
• whether the strategy is successful
• link to financial objectives in order to
  visualise how IT strategy
• is improving the company's financial performance

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Building an IT Balanced Scorecard

• Link Strategy to Resource Allocation
• stretch long term targets
• define long term targets that are realistic
• take strategic initiatives to achieve the
  stretch targets
• define short term milestones for the IT BSC
• link priority settings for IT investment
  projects to the IT BSC
• Link Strategy to Team and Individual Goals
• communicate the IT BSC to the employeees
• link individual objectives of IT employees to
  the IT BSC
• link incentive system to the IT BSC measures
• Organise Strategic Feedback
• act upon the measurement results

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IT Balanced Scorecard and Business Balanced
Scorecard

• IT has to focus more on creating business value
• IT has to shift from the efficiency and cost
  cutting concern to
• a better support of today's and future
  business needs
• an IT balanced scorecard has to address IT
  operational and
• business strategic concerns
• operational monitoring within the IT department
  (IT manager)
• strategic IT's contribution to the business
  (CIO)
• Included IT-Based Capabilities in a Balanced
  Business
• Scorecard (Nolan Norton Institute)
• Strategic IT Balanced Scorecard (GartnerGroup)

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IT Balanced Scorecard and Business Balanced
Scorecard
CEO
Department 1
CIO
Department 2
Systems Development Manager
BusinessBalancedScorecard
Data Center Manager
IT Balanced Scorecard
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IT Balanced Scorecard and Business Balanced
Scorecard (Nolan Norton)
Relationship between IT and business
scorecards BALANCED BUSINESS SCORECARD

Business planning Senior management Business
value of IT STRATEGIC IT BALANCED SCORECARD

IT planning IT management (CIO) Effectiveness of
IT OPERATIONAL IT BALANCED SCORECARD
IT supply
planning IT supply management Effectiveness
and (IT manager) efficiency of IT supply
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IT Balanced Scorecard and Business Balanced
Scorecard (Nolan Norton)
A bank included IT-based capabilities in it's
balanced business scorecard
Net income growth
Financial perspective
Operating costs down
Sales growth
Make products more accessible through new and
old distribution channels
Improve "low cost" perception of potential
current clients
Customer perspective
Internal perspective
Reduce costs by designing IT enabled processes
Start up call centers and automated
electronic distribution channels for internet
Learning and growth perspective
Increase employee productivity through ubiquitous
capabilities
Improve awareness about IT opportunities in
the context of business activities
Learn employees to use productivity tools
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IT Balanced Scorecard and Business Balanced
Scorecard (Nolan Norton)
A retailer included IT-based capabilities in it's
balanced business scorecard
Increase sales by internal growth
Financial perspective
Increase sales with current clients through
higher client satisfaction, minimize out-of-stock
Win new clients through excellence in service and
products
Customer perspective
Lower costs of staff and materials by using
more efficient planning models
New marking effort by introduction of client
loyalty card linked to direct marketing systems
Internal perspective
Automated planning of supplies by integrating
POS with external suppliers to distribution
centers
Learning and growth perspective
Train employees in use of IT sales forecasting
tools
Train employees in service and selling skills
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IT Balanced Scorecard and Business Balanced
Scorecard (Gartner Group)
Cascade of Business and IT balanced scorecards
Financial 1. EPS Customer 1. Retention
2. Wallet share Internal
1. Service delivery 2. New
services Innovation 1. Customer profiles
2. Web interface
BUSINESS SCORECARD
Customer 1. Web interface
2. Customer profiles Technology 1. Web
tools 2. Data
warehouse Process 1. Rapid prototyping
2. Data mgmt People
1. Recruitment 2.
Training
IT SCORECARD
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IT Balanced Scorecard Practice

• Some start-ups in Belgian organizations
  Belgacom, Belgian
• Gendarmerie, BBL, ...
• Problems in applying the IT BSC
• IT balanced scorecards tend to be more
  operational than
• strategic management systems
• insufficient cause-and-effect relationships and
  performance drivers
• the distribution of the IT balanced scorecards
  is restricted
• to senior and IT management
• developing and implementing the IT balanced
  scorecard is
• not seen as a project